The United States Securities and Exchange Commission (SEC) issued a letter of allegation on the last day of July to IRL, a company that was once seen as a leader in the social field.
The founder behind the company, Abraham · Shafi, rose to prominence for the project and vowed to make IRL the WeChat of the West. However, in the latest round of funding, Shafi is accused of illegally obtaining approximately $170 million from investors through improper means such as false reporting of user data and due diligence fraud.
SoftBank Group was the biggest victim in this incident, and its founder, Masayoshi Son, led the SoftBank Vision Fund to participate in IRL's Series C financing. The incident provides important lessons for venture capital firms, and the SEC has specifically reminded investors to remain vigilant in the allegations posted on its website.
From 12 Minutes to $1 Billion: Lessons from Masayoshi Son
In 2017, Son had a meeting with Adam · Neumann. This brief exchange gave Son a strong sense of trust in Neumann, whom he believes is a leading figure in the future of technology.
Subsequently, SoftBank Vision Fund began to invest in WeWork. However, a subsequent investigation revealed that in response to the investor's due diligence, Neumann organized a fake presentation of the company's business. The scam led SoftBank to pour more than $10 billion into WeWork. Neumann, on the other hand, used the funds to make a lot of acquisitions and expansions, while also using some of them for personal gain.
Eventually, the conflict between the two sides escalated to the point of legal action. Son issued a public apology, saying they had "created a monster."
Now, a similar situation is playing out in the IRL.
In August 2023, SoftBank filed a formal lawsuit against IRL, alleging fraud in question, particularly with regard to the subscriber base and statistics. SoftBank is seeking $150 million in damages, equivalent to about 1.089 billion yuan. Specifically, SoftBank claimed that IRL received financial support by falsely reporting 12 million monthly active users in 2021 and falsely claiming that 25% of teens under the age of 18 downloaded their apps.
This accusation is not unfounded. In the course of SoftBank's due diligence, the third-party team has identified some suspicious points from IRL's public report. For example, a public report as of spring 2021 showed that the total number of app downloads was only 9 million, while the CEO claimed 12 million.
In response, the response at the time was that the public report did not include all users who accessed the IRL platform through the app and website. He also explained that the data of underage users is also not included due to data privacy regulations. After accepting this explanation, SoftBank eventually led the Series C financing.
In 2022, after a rapid expansion, IRL had to carry out a massive layoff, laying off nearly a quarter of its employees. The move raised questions among employees about the veracity of the company's claim of "20 million monthly active users." This is particularly illogical considering that even at peak times, IRL only has about a hundred employees to maintain day-to-day operations.
亚伯拉罕·沙菲（Abraham Shafi）
Subsequently, some tech media in the United States began to question the situation of IRL, which attracted the attention of the United States Securities and Exchange Commission. The commission then launched an investigation into the IRL. In response, IRL also conducted an internal review and decided to suspend Shafi from his position in April 2023.
The results of the investigation shocked the public and revealed an incredible fact:
The SEC's allegations reveal material misconduct in IRL's financial reporting. Specifically, IRL spent millions of dollars on rewarded ads to promote its app, while its CEO, Shafi, significantly understated marketing expenses in the company's offering documents. To make matters worse, Shafi uses third-party payment platforms to hide these huge fees. In addition, he misused the company's business credit card and spent hundreds of thousands of dollars with his fiancée on personal expenses, such as clothing, home improvement and travel, which were not disclosed to investors.
The incident marked the rapid decline of a once-highly bullish unicorn. Despite SoftBank's lawsuit against Shafi, the company's losses seem inevitable.
Reality is always more magical, and these dramatic scenes outline a little-known side of the VC/PE circle.
When conducting due diligence, professionals have learned some key lessons: when the person being questioned shows hesitation and undetermination when explaining the situation, it usually suggests that they may be withholding certain information; If you are unusually nervous or angry in the face of doubt, it often means that there is a problem behind it. In addition, knowing the founder's family background, marital status is essential to prevent possible property disputes in the future. In some areas, such as Jiangsu and Zhejiang, it is even necessary to investigate the illegitimate children of potential founders and the enterprises they control to ensure the safety of investment.
Perhaps the investor has suffered too much due to due diligence negligence, and the trust between investors and project parties is now thin, and more integrity requirements are written in black and white into the project terms. An investor sighed.
Zheshang Science and Technology Statement: This article does not constitute any investment advice.